There is always room for another PACA story. Perhaps had Produce Pay, Inc. read this blog it would be in a better position today. Instead…., well read on.
Produce Pay billed itself as a “multi-service finance company” that could provide “access to cash flow…the day after you ship your produce to the U.S.”. Spiech Farms, LLC is a grower and processor of blueberries, asparagus, and grapes. Spiech fell on hard times in early 2017 when frost destroyed a significant portion of its blueberry crop. In an attempt to shore up its financial state, Spiech entered into a “Distribution Agreement” with Produce Pay.
The Distribution Agreement provided that Spiech would notify PP that it had a pallet of produce for sale by registering that pallet on Produce Pay’s software platform. Produce Pay would then purchase the pallet of produce from Spiech for half the market price. In connection with that purchase, Spiech would assign “all right, title and interest” in the produce to PP, but Spiech would keep the produce in its possession.
Spiech would then sell, or attempt to sell, that produce to a grocery store or other customer. Whether Spiech sold the produce or not, it was obligated to repay the money it received from Produce Pay, plus a commission, within 30 days after receipt. After 30 days, the commission rate increased. After 60 days, Spiech had to “repurchase” the produce from Produce Pay by repaying the purchase price to Produce Pay, plus a commission. Although the agreement claimed the transaction to be a purchase of the produce, In effect, the agreement, provided for short-term loans from Produce Pay as a partial advance on payments that Spiech expected to receive from its existing customers. Also by listing its produce on Produce Pay’s software platform, Spiech could potentially reach new customers. If Spiech sold the produce to a customer introduced by Produce Pay, then Produce Pay would receive a higher commission.
As you must have anticipated, Spiech filed for bankruptcy protection.
Produce Pay asserted a $1 million PACA claim against the bankruptcy estate to recover the unpaid cash advances that Produce Pay made to Spiech. The bankruptcy court held an evidentiary hearing and denied Produce Pay’s claim. Produce Pay appealed to the United States District Court for the Western District of Michigan.
Readers of WCS will recall our two-part blog published in March of 2018, which addressed a decision of the Ninth Circuit Court of Appeals in which the Ninth Circuit reversed its long standing policy of not exercising a “true sale” analysis in situations concerning factoring of PACA receivables. In doing so the Ninth Circuit joined the Second, Fourth and Fifth
…. a PACA trustee’s true sale of accounts receivable for a commercially reasonable discount from the accounts’ face value is not a dissipation of trust assets and, therefore, is not a breach of the PACA trustee’s duties. … (“The assets of the trust would thus have been converted into cash and the receivables would no longer have been trust assets.”… “[A] ‘bonafide purchaser’ of trust assets receives the assets free of claims by trust beneficiaries” and noting that the determinative issue on appeal is whether the “factoring agreement” was a loan secured by accounts receivable or a true sale of accounts receivable); … (“[N]othing in PACA or the regulations prohibits PACA trustees from attempting to turn receivables into cash by factoring. To the contrary a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee’s primary duty.”)…
Produce Pay apparently believed that by purchasing produce with full recourse it would obtain the benefits of a PACA trustee. Instead, it paid a high tuition for its lesson.
The District Court affirmed the bankruptcy court’s denial of Produce Pay’s PACA claim, stating:
The bankruptcy court properly determined that Spiech did not transfer its receivables, or any other interest protected by a PACA trust, to [Produce Pay]..
The District Court went on to say:
…when making this determination, the bankruptcy court employed a “transfer-of-risk” test that has been used in circumstances that are different from the instant case. In the cases cited by the bankruptcy court, courts applied this test to determine whether the buyer of agricultural commodities breached its duties as a PACA trustee when entering into what was either a lending arrangement or a sale of the buyer’s rights in its own receivables. [citations omitted] But there is no reason why the same test should not apply to the agreement between Spiech and [Produce Pay]. Indeed, the UCC recognizes that it is not unusual for a commercial agreement to “blur” the distinction between a transaction “in which a receivable secures and an obligation” and one in which “the receivable has been sold outright.” [citation omitted] This is one of those agreements. Although the circumstances of the aforementioned cases were different, the transfer-of-risk test performs the same basic function in those cases as it does in this one; it helps the court distinguish the true nature of the parties’ agreement. It was not improper for the bankruptcy court to employ a widely-used test to ascertain whether the distribution agreement assigned Spiech’s rights in its receivables.
Although not specifically stating it, both courts utilized a “true sale” test. Simply, Spiech sold its produce or its receivables, Produce Pay retained full recourse to Spiech, denying it the protection of a “true sale.”
Had Produce Pay followed this blog [OK, the facts in this case preceded the March, 2018 blog] it would have been $1mm richer.
The takeaway for lenders and factors following this blog is to exercise caution when dealing with collateral that is protected by PACA. When PACA bites, it takes a pound of flesh with it.
In re: Spieth Farms, LLC, Debtor, Produce Pay, Inc v Spiech Farms, LLC. (United States District Court, W.D. Michigan, December 17, 2019)